MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 23, 1998 (1)
Saturday, January 24, 1998
Canadian markets were buoyed by news of a proposed merger between Bank of Montreal and Royal Bank. U.S. stocks fell on fears that slow Asian economies will cut into profit growth.
The Toronto Stock Exchange 300 composite index rose 103.83 points, or 1.6%, to 6490.99, for a gain of 1.1% on the week.
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The exchange reported a record trading value of $3.45 billion. The previous record value was $3.41 billion on Oct. 28.
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On the broader TSE, banks were responsible for 37.9 million of the 132.6 million shares that changed hands. About 101.2 million shares traded on Thursday.
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Canadian banks gave up much of their early advance, and the TSE 300 trimmed more than half of an earlier 226-point gain, after Finance Minister Paul Martin said the government would not consider approving a proposed merger between Royal Bank of Canada and Bank of Montreal before a task force completes a bank merger study in September.
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Royal Bank (RY/TSE) gained $3.90 to close at $75.75 after hitting a high of $80 intraday. Bank of Montreal (BMO/TSE) rose $10.45 to $67.70, after earlier reaching $72.
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Traders and analysts expect stocks to be volatile in the week ahead as investors react to quarterly profit reports. "Everything will be based on earnings," said James Mountain, managing director of private client equity trading at ScotiaMcLeod Inc. Beamscope Canada Inc. and BCE Mobile Communications Inc. will report Monday, followed by Nova Corp., BCE Inc. Imasco Ltd. and Methanex Corp. Wednesday.
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Barrick Gold Corp. (ABX/TSE) rose $1.95 to $27.75, Placer Dome Inc. (PDG/TSE) gained $1.85 to $19.50 and Franco-Nevada Mining Corp. (FN/TSE) jumped $1.75 to $33 as the price of bullion soared US$9.10 to US$299.90 an ounce on the Comex division of the New York Mercantile Exchange.
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"Weakness in the US$ has created a bit of nervousness and funds came in and bought back to cover short positions," said Alastair McIntyre, a director of ScotiaMocatta, a division of Scotia Capital Markets.
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The TSE gold subgroup advanced 6.6%.
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Other Canadian markets ended the week mixed.
The Montreal Exchange portfolio rose 88.98 points Friday, or 2.7%, to close at 3332.70, up 1% for the past seven days.
The Vancouver Stock Exchange rose 1.62 points, or 0.3%, to 589.8, but on the week it was down 0.7%.
For a scorecard of trading activity on all Canadian Stock Exchanges, go to: quote.yahoo.com .
The Dow Jones industrial average fell 30.14 points, or 0.4%, to 7700.74, a loss of 0.7% for the week.
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The Standard & Poor's 500 composite index fell 5.46 points, or 0.6%, to 957.58, and dropped 0.4% on the week. The Nasdaq composite index fell 0.58 of a point to 1575.93, but outperformed the other indexes on the week, rising 0.8%.
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About 633.4 million shares changed hands on the New York Stock Exchange, compared with 649.5 million shares traded on Thursday.
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Shares of J.P. Morgan & Co. (JPM/NYSE) closed below US$100 for the first time in almost nine months. The stock skidded US$3 3/16 to US$99 7/16. Republic New York (RNB/NYSE) lost US$25 1/88 to US$103 9/16.
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Computer stocks gained to trim the market's overall losses.
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Gateway 2000 Inc. (GTW/NYSE) jumped US$3 9/16 to US$371 1/84 after the personal computer maker hired a top AT&T Corp. executive as its new president and reported unexpectedly strong fourth-quarter earnings.
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Gateway benefited from falling prices of memory computer chips, disk drives, and microprocessor partly as a result of declines in Asian currencies. Rival Compaq Computer Corp. (CPQ/NYSE) rose 5 1/88 to US$313 1/84 and Dell Computer Corp. (DELL/NASDAQ) gained US$2 5/16 to US$94 13/16.
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The day's most active stock was Iomega Corp., (IOM/NYSE), which tumbled US$3 15/16 to US$8 13/16 in trading of 28.8 million shares. The maker of portable disk drives blamed slowing demand in Asia for fourth-quarter earnings below analysts' estimates.
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Major international markets ended mixed.
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London: British stocks dropped as Wall Street came under pressure. The FT-SE 100 index closed at 5181.4, down 71.7 points or 1.4%, for a loss of 1.6% on the week.
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Frankfurt: German stocks ended in negative territory after further falls by the US$. The Dax index closed at 4237.31, up 17.06 points or 0.4%, for a gain of 1.3% on the week.
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Tokyo: The Japanese stock market's key index surged. The 225-stock Nikkei average closed at 16,789.11, up 383.42 points or 2.34%, a rise of 4.6% for the week.
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Hong Kong: Stocks ended slightly higher. The Hang Seng index closed at 8920.2, up 36.47 points or 0.4%, a gain of 0.2% on the week.
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Sydney: The Australian stock market ended higher, led by miners. The all ordinaries index closed at 2623.3, up 23.9 points or 0.9%, an increase of 0.4% for the week.
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Inside the Market -- By PATRICK BLOOMFIELD
Toronto and New York go their separate ways
Thank heaven for Canada's big banks. ÿWhatever their purported errors and omissions in the fields of executive compensation, electoral practices, etc., etc., they sure perked up Bay Street in a singularly dud market day for Wall Street.
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As will be plain from the volumes already written and spoken, Royal Bank of Canada (RY/TSE) and Bank of Montreal (BMO/TSE) were the catalysts, proving, in the process, that the big can also be nimble. From all appearances, their projected merger deal was done speedily, and without an upward twitch in either stock price ahead of the news - a creditable achievement.
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The excitement surged right through the banking and trust company sector, all the way to Montreal-based tobacco and consumer-products major Imasco Ltd. (IMS/TSE), which holds 98% of CT Financial Services Inc. (CFS/TSE), parent of Canada Trust.
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It abated a little after Finance Minister Paul Martin effectively put approval of the deal on hold until Ottawa's task force on the banking business reports in the fall. But Toronto-Dominion Bank (TD/TSE), the smallest of the Big Five (and, presumably, the more likely to be swallowed in any future merger), still managed a tell-tale 10% gain.
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All this left the Toronto Stock Exchange's 300 composite stock index nicely on the plus side, while Wall Street was hard put to contain its losses - and with good reason.
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Just in case the news out of Asia was not enough to cast doubts on U.S. corporate earnings prospects in 1998, the White House went into siege mode on the allegations that President Bill Clinton had not only had an affair with a young White House intern, but that his friend and adviser (and, it seems, legal problem fixer) Vernon Jordan had persuaded her to fib about it in sworn statements.
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White House spokesman Mike McCurry staged a quite magnificent effort to reassure the media that Clinton and his cabinet were really rather busy getting on with their urgent national and international business. He even went as far as to suggest that stock prices fell (and then rose again) every time there were allegations about a member of the administration. So why, one was implicitly tempted to ask, were things different this time?
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The truth is that, this time, things are different. As one commentator put it, Clinton's own Democrat mates in Congress, rather than rise to his defence, have maintained a deafening silence. If he loses their support, he is a lame duck - a thought that has by no means been lost on the politically savvy people in Wall Street.
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Meanwhile, as McCurry put it so diplomatically, "people in foreign capitals look at us and wonder why we do these things to ourselves."
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A likely explanation is that they may not be familiar with all the nuances of U.S. public ethics, but they have grasped that something serious is going on. That sheds doubt on U.S. being able to take a pro-active role in quietening down global trouble spots and also spells opportunity for those who feel they might usefully cause some trouble in those spots.
Meanwhile, Clinton has still to persuade dubious legislators that contributions to the International Monetary Fund's bail-out packages are a worthwhile use of U.S. taxpayers' money.
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All these thoughts were reflected in lower U.S. stock and bond prices, notwithstanding good earnings news from Xerox Corp. and Chrysler Corp. Even the latter event was overhung by Asian concerns. Chrysler chairman Robert Eaton hoped to maintain the impetus, but talked of a "very difficult market out there."
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Greg Maffei, chief financial officer of the mighty Microsoft Corp. (MSFT/NASDAQ), had a like theme in the conference call that followed release of the great second-quarter numbers, maybe following a slightly different agenda.
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"As usual they tried to talk down expectations," one portfolio manager commented afterward, and most of his brethren would know what he meant.
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Microsoft, a liberal user of stock options for employee remuneration, had been in the habit of buying back its own shares in the marketplace to balance new shares issued on the exercise of these options. And, with the Great Bull Markets of 1995, 1996 and 1997, this habit had become embarrassingly expensive.
So much so that Microsoft's penchant for spotting wolves circling the campfire, when commentating on yet another good result, had begun to be taken as - just that.
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This time, however, the wolf has shape, an Asian shape, which Maffei suggested would lower sales in affected markets US$300 million below plan. He even suggested an earnings and revenue decline between the third and fourth quarters, ahead of any boost from the long-delayed launch of Windows 98, scheduled for mid-year.
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Introducing the Monster Bank -- By WILLIAM HANLEY
So that's what Mbanx means: Monster Bank.ÿAnyway, that's the name that gets our vote for the merged Royal Bank of Canada-Bank of Montreal entity. In fact, how about The Entity?
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On Friday, "First Canadian Bank" seemed to be the front-runner. But we are sure that Canadians can come up with far richer names to capture the essence of the bank-in-waiting. In fact, Finance Minister Paul Martin could help the country vent some steam if he insisted on the banks running a nationwide competition to name the entity.
First prize: a sum equivalent to 1% of the stock options held by John Cleghorn and Matthew Barrett, a tape of the Canadian Bankers Association "kinder, gentler banks" TV commercial and an eight-by-ten glossy of shareholder activist Yves Michaud.
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Canada's banks, at once clubby and intensely competitive, do have an image problem that will not go away: they live with the opprobrium of customers, shareholders, the media, politicians, even some of their employees.
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But they have been warning for several years now that they will have to merge to get the sheer size and economies of scale to compete in globalized financial markets. So this is the test case.
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They know they cannot win in the court of public opinion, so they are hoping that their "survival of the fattest" argument will fly in Ottawa. We can only imagine the rhetoric flying at the Liberal caucus meeting in Collingwood, Ont., this weekend. Many MPs will not want to be known as the people that let the big, bad banks get bigger and badder.
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And yet, all the hostility aside, the Monster Bank does make eminent sense. And that is just what the markets were telling us on Friday.
The 7.3% rise in the Toronto Stock Exchange financial services index points to a further re-evaluation of the bank stocks similar to the one last year that boosted price-earnings multiples for the group to levels not seen in more than 20 years. The trailing P/E multiples - in the nine to 14 range after Friday's rise - could rise a couple of notches to match those of the big U.S. money centre banks.
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The betting here - and, make no mistake, it is a bet - is that the merger will eventually go ahead after the banks have agreed to some regulatory concessions and made motherhood-type promises to be even kinder, gentler and fairer than they are even now.
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With Martin saying that a decision cannot be made till the bank merger review is completed in September, the banking sector will be a traders' market, with huge upside and downside possibilities.
The Monster Bank merger basically puts everything in the sector into play, as Friday's across-the-board advances clearly showed.
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Almost lost amid the bank merger, Bill Clinton's alleged merger activities and the C$'s continuing de-merger from the US$ was Friday's jump in gold to within a whisker of US$300 an ounce.
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Spot bullion is up more than US$20 from its recent 18 1/2-year low and seems, finally, to be breaking out of its downward channel as the US$ weakens against the yen and the mark.
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In the Asian crisis, the US$ had usurped gold's position as the ultimate store of value. If the greenback continues to decline, gold should continue to shine as investors look for a safer haven.
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Also rising with gold this week were the TSE metals and forestry sectors, which are now 10% above their 52-week lows. As we have noted previously, the fundamentals do not indicate these sectors are screaming buys, but various indicators - technical and otherwise - showed they were ready to bounce. And they did.
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If gold can keep on rising, the metals and forestry stocks should benefit. Then, the only piece missing from the commodities puzzle would be the energy sector.
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Though the C$ continued to decline against the US$ on Friday, the rise in the Canadian commodities stocks is a hopeful sign. Canada and the C$ are better buys when our resources are in demand.
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As with currency plays everywhere, speculators have made the C$ a momentum play. And with the Bank of Canada reluctant or unable to boost rates, the momentum is still to the downside, even though the currency is looking deeply oversold.
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Look for a break in the momentum soon. When the C$ starts to trade the other way, short-covering will probably produce a powerful rally.
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GREENSTONE RESOURCES LTD. (GRE/TSE), up 60› to $7.60, on volume of 678,255 shares. The Toronto-based gold miner's shares have risen 57% since their Dec. 9 low of $4.95. The company is actively mining the Cerro Mojon gold mine in Nicaragua, with reserves of 1.8 million ounces, and on Friday announced positive drilling results adjacent to the property, said Judy Baker, analyst at Loewen Ondaatje McCutcheon Ltd. ÿPer ounce production costs should fall to US$200 in 1998 compared with US$250 in 1997, said Baker. "This is a good mid-peer gold producer that will offer investors good growth rates with low-cost production."
BARRICK GOLD CORP. (ABX/TSE), up $1.95 to $27.75, on volume of 2.7 million shares. Placer Dome Inc. (PDG/TSE), up $1.85 to $19.50, on volume of 3.2 million shares. TVX Gold Inc. (TVX/TSE), up 41› to $4.06, on volume of 1.3 million shares. ÿShares in Canada's major gold producers' gained ground as the price of bullion in New York rose 3%, or US$9.10, to US$299.90 an ounce. The Toronto Stock Exchange gold and precious metal subindex rose 474.1 points, or 7.6%, to 6715.29.
TRIMARK FINANCIAL CORP. (TMF/ TSE), down $3.40 to $49, on volume of 152,744 shares. The mutual fund company, with $27.3 billion of assets under management, said third-quarter income rose to $21.4 million (46› a share) from $10.6 million (24›) a year earlier. But unit redemption levels have also been rising, up 68% to $1.9 billion for the nine months ended Dec. 31, from $1.1 billion for the same period a year earlier. Dan Richards, president of Toronto-based Marketing Solutions, predicts that net industry sales in 1998 will drop 20% to 30% from $52.33 billion in 1997 to $35-$40 billion in 1998.
MAGNA INTERNATIONAL INC. (MGa/ TSE), down 50› to $84.80, on volume of 71,714 shares. ÿThe Aurora, Ont.-based auto parts maker's shares fell 5% this week after founder Frank Stronach announced plans for a theme park in Austria. Investors fear the park will distract the company from its core business. ÿ"Magna would only proceed in concert with other equity investors on a project financed basis and/or through a separate public company established specifically for this purpose," the company said.
GEAC COMPUTER CORP. LTD. (GAC/ TSE), up 20› to $45.70, on volume of 263,011 shares. The computer-system manufacturer's shares recovered 11% this week after being caught in a downdraft two weeks ago, said Howard Lis, analyst at Griffiths McBurney & Partners. ÿLis said the stock is undervalued and he reiterates his "buy" recommendation and a target price of $60 without including any future acquisitions. "Its a matter of when, not if they make a U.S acquisition ... and in calendar 1998 they will be listed on a U.S stock exchange."
RESEARCH IN MOTIONS LTD. (RIM/TSE), up 40› to $6.10, on volume of 2.2 million shares. ÿGriffiths McBurney & Partners was responsible for the biggest trade, and crossed 1.6 million shares at $5.75 each. The high volume in the small manufacturer of radio modem technologies is due to a winding up of a 90-day escrow period dating back to the firm's initial public offering in October, said Barry Richards at Sprott Securities Inc. ÿOver 90% of the 10 million shares issued at $3.40 each were placed in voluntary escrow and "some of those guys were looking to lighten up on their position," said Richards. "The fact that the stock price rosemeans that people like the company's fundamentals and there was also concern that the block might be bigger."
INTERNATIONAL WALLCOVERINGS LTD. (IWL/TSE), down $1.90 to $11.60, on volume of 23,000 shares. The shares of the Brampton, Ont.-based maker of wallcoverings have slid since their 52-week high of $19 in July. But analysts are confident it is a solid player in a lacklustre market that sports a modest growth rate of 5% annually.
WALT DISNEY CO. (DIS/NYSE), up US$2 1/4 to US$98 11/16, on volume of 1.6 million shares. ÿMorgan Stanley Dean Witter, Discover Co. analyst Richard Bilotti raised his rating on the diversified entertainment group's shares to "outperform" from "neutral". The company's decision to cut costs and boost revenue will increase margins and revenue is expected to rise with plans to build a new theme park, said Bilotti.
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A better year forecast for Canadian biotech stocks -- By SONITA HORVITCH
Duncan Stewart, partner in Toronto-based money manager, Tera Capital Corp., expects to see some improvement in the performance of Canadian biotechnology stocks this year.
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Tera specializes in technology and biotechnology companies. The firm manages Navigator Fund Co.'s Navigator Canadian Technology Fund.
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"Last year was unquestionably disappointing for biotechnology stocks," said Stewart.
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Although the U.S. Food and Drug Administration (FDA) expedited the review of a wave of new products, many were not as successful as had been expected.
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The good news now is that biotechnology stock valuations are not too high "and the odds are that there will be significant good news about successful drugs from companies this year," said Stewart. It helps that the FDA has speeded up its approval process substantially.
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Stewart is also optimistic about the high-technology sector. Investors were worried that North American hardware and software producers would suffer because of a falloff in demand from Asia. But judging from recently reported numbers from some of the technology giants, the reduction in Asian demand has been offset by an increase in North American and European sales.
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In the technology field, stocks Stewart is selecting include:
* PC Docs Group International Inc. (DXX/TSE), which closed recently at $7.85 and has a 52-week trading range of $13.50 to $6.50. ÿThe Toronto-based document management software manufacturer is completing the acquisition of Ottawa-based Fulcrum Technologies Inc. at "a reasonable cost." Fulcrum makes complementary products and the acquisition will enable PC Docs to offer a more comprehensive solution for customers, said Stewart. He expects the merged companies' earnings to show considerable improvement. His per share estimate for PC Docs is 25› for fiscal 1998, ending June 30, and 45› for fiscal 1999.
* ATI Technologies Inc. (ATY/TSE) $39.50 ($40-$16). ÿBased in Thornhill, Ont., the company designs and makes graphic accelerators for computer manufacturers. "It is one of the leaders in its field and a real Canadian success story," said Stewart. His earnings per share estimate is $2 for fiscal 1998, ending August, and $2.50 for fiscal 1999.
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* He still likes JDS Fitel Inc. (JDS/TSE) $84 ($95-$27.20), which makes and markets products for the fibre optic industry. It was his top pick in this column Oct. 24 at $83.
ÿIn the biotechnology sector, Stewart is choosing:
* Salix Holdings Ltd. (SLX/TSE) $4.90 ($7.05-$4.75). ÿBased in Palo Alto, Calif., the company develops and markets prescription pharmaceutical products with a focus on gastrointestinal disease. ÿThe company's first drug is Colazide, a treatment for ulcerative colitis. The drug has been launched successfully in Britain. Salix has
other products in the pipeline, said Stewart. ÿSalix's strategy is to acquire late stage, near to market drugs so there is not the same degree of risk as that attached to earlier stage products. It has no earnings, "but will have revenue from products sooner than most of the companies in this sector."
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* The money manager continues to like Inex Pharmaceuticals Inc. (IEX/TSE) $5.25 ($9.50-$3.50), which develops drug delivery systems. It was his pick in this column July 1 at $6.75. He also continues to champion Ibex Technologies Inc. (IBT/ME) $3.10 ($8.45-$2.50), which develops enzyme-based therapeutics for cardiovascular disease. It was also a selection in the July 1 column at $5.80.
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He has sold Xillix Technologies Corp. (XLX/TSE) $2.15 ($3.80-$2), which develops medical imaging technologies for the early detection of cancer. "The medical profession has been slow to adopt this system."
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